Quality of public finances is key to
improving sustainability, increasing economic growth and the smooth functioning
of EMU

Raising the quality of public finances, in other
words getting value for taxpayers' money, is key to improving the sustainability
of public finances. It should also help raise the growth potential of the
European Union by enabling resources to be freed to reduce debt, lower taxes and
invest more, including in human capital. The Commission Communication
accompanying the 2008 Public Finances Report identifies a number of areas for
action regarding the way governments formulate, implement, and assess their
budgetary strategies as well as how the preventive arm of the Stability and
Growth Pact can be more effective in supporting the achievement of sustainable
finances while contributing to higher growth and employment and a better
functioning Economic and Monetary Union. The proposals build on the 2005 SGP
reform and the May 2008 Commission Communication on EMU@10.

"Although the budgetary situation has improved remarkably in the last few
years, it is quite clear that there is still scope for progress in enhancing the
quality of public finances. The benefits of sound fiscal policies are clear:
reducing deficits and debts and generally improving the quality of budgets would
enable Member States to free the necessary resources to encourage innovation,
investment, education and employment which, in turn, would allow them to face
more confidently the challenges posed by globalisation and an ageing
population", said Joaquín Almunia, Economic and Monetary Affairs
Commissioner.

The Commission today adopted a Communication to Parliament and the Council on
the role of quality of public finances in the EU governance framework. It
accompanies and draws on the 9th annual Report on Public Finances, also released
today. The Communication argues that better quality is not just an end in itself
but could also allow synergies between the main instruments of EU economic
policy coordination. It should for example enable better linking of the
different instruments of economic governance, specifically the Stability and
Growth Pact (SGP) and the Lisbon Strategy for Growth and Jobs.

In 2007 the budgetary situation improved markedly. The EU's average deficit
was reduced to 0.9% from 1.4% in 2006 (and to 0.6% from 1.3% in the euro area).
Reflecting the improvement of fiscal balances, the level of outstanding debt
stayed on a clear downward path. In the EU as a whole it has already fallen to
below the Treaty reference value of 60% of GDP, while in the euro area it is
approaching that figure.

This development reflected continued progress in the correction of excessive
deficits. In January 2006, no fewer than twelve countries were subject to the
procedure under the dissuasive arm of the Pact. Two and a half years on, the
number is down to two, Hungary and Poland, and in the case of the latter the
possible abrogation of the procedure will be discussed at the July Ecofin. Since
last year's public finances report was published, the Council has abrogated the
excessive deficit procedure for five countries, including most recently the
Czech Republic, Italy, Portugal and Slovakia. However, the Commission is closely
considering the situation in the UK as its budgetary prospects have
deteriorated.

Despite this progress, Member States still face a number of major challenges
that call for further progress on fiscal policies. First and foremost, potential
GDP growth in many Member States is still constrained by an inefficient use of
resources, including by the public sector. At the same time, the current strong
inflationary pressures are reducing the room for manoeuvre in the conduct of
policies. Second, the ongoing process of population ageing will make the
consolidation of public finances difficult to sustain unless it is continued and
accompanied by structural reforms. And third, increasing exposure to global
competition puts pressure on EU governments to reconsider the relatively high
tax, administrative and regulatory burden in Europe and to improve provision of
public services and goods, so as to deliver much-requested better value for
money.

In the light of the need to ensure sustainability of public finances and to
foster long-term economic growth and the smooth functioning of EMU, and drawing
on the broad principles laid out in the “EMU@10” Communication of
May 2008, the Commission identifies four areas for action to improve the focus
on the quality of public finances:

More systematic and comprehensive reporting on improvements of quality of
public finances and on structural reforms in the context of the Stability and
Convergence Programmes is called for. This step towards developing a more
systematic approach for assessing the efficiency of public spending would be of
help in gauging the quality of public finances overall.

Member States are invited to move towards budgetary procedures that take
performance into account. Regular budget reviews, including efficiency analysis,
could also be instrumental for expenditure prioritisation.

Enhancing the effiency of tax systems is an important part of a
comprehensive strategy to revitalise European economies. The key objective is to
have simple rules and broad tax bases, while avoiding loopholes, inefficient tax
expenditures, special tax regimes and unnecessary exemptions. Easing the high
tax burden on labour by shifting to other tax bases may be one way forward.

A regular review of the quality of public finances in the Member States,
conducted jointly by the Economic Policy Committee and the Commission in line
with tried and tested methods of collaboration, could strengthen the focus on
the quality of public finances in the surveillance framework and spotlight its
relevance for the Strategy for Growth and Jobs.